Australian money manager John Hempton has called the battle between investor Bill Ackman and nutritional-supplement company Herbalife “hedge-fund porn.”

There is indeed something vaguely obscene about the ongoing drama, but the plot is much richer — and more interesting — than that of the typical skin flick. The Ackman-Herbalife tussle is probably more accurately compared to a Russian novel: complex and full of moral ambiguity.

Here’s the backstory. Last month Ackman, CEO of the hedge fund Pershing Square Capital Management, explained to an investment conference in Manhattan why he had recently made what is essentially a $1 billion bet that Herbalife is a pyramid scheme that’s bound to collapse or be shut down by the Federal Trade Commission (FTC).

The allegation is a function of the fact that, like companies such as Amway and Avon, Herbalife is a so-called multilevel-marketing (MLM) firm. This basically means that it not only sells products to consumers through a network of sales representatives — who receive commissions on those sales — but also that it rewards them for recruiting additional sales reps and gives them a cut of any sales made by those they recruit. MLM firms in general, and Herbalife in particular, have long faced accusations that they are essentially pyramid schemes — unsustainable business models that will eventually collapse when new recruits can no longer be found to form the ever-growing base of the pyramid structure.

Herbalife and other multilevel marketers often use ad campaigns that suggest one can attain financial independence by joining their teams of network marketers. And this can come off as pretty sleazy, as anybody who takes just a few minutes to examine the situation realizes that the vast majority of people who get into the business aren’t going to make much money at all. (Even if you discount Ackman’s estimate that 98.9% of Herbalife distributors make $475 or less per year before expenses, Herbalife itself says only 9.85% of distributors average more than $7,354 in gross annual compensation.) For this reason alone, I would warn people to proceed with extreme caution before investing time and money in any MLM company, if not to avoid them altogether.

But does a low compensation rate make Herbalife an illegal pyramid scheme? Not necessarily. Unfortunately, it’s not entirely clear what would make that determination. Courts have tried to set guidelines in response to various lawsuits, but the case law remains ambiguous. One recent FTC ruling says the dividing line between a legitimate MLM and a pyramid scheme is whether “participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers.” But Herbalife maintains that it is in compliance with this rule, arguing in a 2009 presentation to investors that 69% of distributor compensation comes from retail sales rather than recruitment rewards.

For his part, Ackman attributes such calculations to the company’s complex accounting methods, and says that after spending a year and a half researching Herbalife he has amassed hard evidence that the company derives the majority of its revenue from the recruitment of new members — and not from the sale of Herbalife products, which he believes are overpriced and undifferentiated from competing merchandise.

Is Ackman right? To my eyes, his presentation convincingly shows that, at the very least, something strange is going on at the company. First Ackman notes that Herbalife claims to sell $1.8 billion worth of its top-selling product, a nutritional shake powder — a figure larger than what household names such as Clorox and Betty Crocker bring in — even as the firm spends next to nothing on advertising or research and development. Herbalife’s shake powder competes with what Ackman says are nearly identical offerings from GNC, Slim-Fast and Ensure. Yet, he notes, Herbalife claims to sell anywhere from ten to twenty times more nutritional powder than its competitors, even though the suggested retail price is more than 2.5 times greater than those of competitors Ensure and Slim-Fast. Ackman contends that Herbalife products are so popular because the company is really selling a business opportunity, and through its complex set of rewards for recruiting new distributors and getting those distributors to buy product, it is tricking millions of people into furthering a massive pyramid scheme.

Of course, Ackman is hardly an objective figure in this dispute. He’s a hedge-fund manager who stands to make a lot of money for himself and his investors on his bet against Herbalife. (His fund is short some $1 billion worth of the company’s stock, meaning he makes money if the stock price falls.) One might argue that his bet proves that he is acting in good faith — he is, after all, putting his money where his mouth is.

But here is where the plot thickens. Short sellers receive nearly as much public opprobrium as MLM firms. Short selling has been around for hundreds of years, but often comes to the public’s attention during financial panics, when astute short sellers make huge fortunes by betting that various securities will lose value. That timing gives shorts a reputation for preying on broader misery. They also frequently stand accused of market manipulation: critics say short sellers often create the perception that a stock is doomed, and then make money when that perception drives down the stock price — even if there was little basis in reality for their claims.

In other words, regardless of whether Herbalife is doomed to topple under the weight of an unsustainable business model — and regardless of whether he is acting in good faith — Ackman can “win” his bet merely by convincing investors and (perhaps more importantly) federal regulators that Herbalife is a scam. In short, the criticism of a well-funded short like Ackman can be a self-fulfilling portent. Thus the reaction: after news broke in December of Ackman’s short position, Herbalife CEO Michael Johnson took to CNBC airwaves, calling Ackman’s actions “blatant market manipulation” and wondering aloud, “Where is the SEC in protecting individual shareholders?”

Indeed, there was speculation that Ackman was using his reputation in the financial community, along with the financial media’s desire for a good story, to temporarily depress Herbalife’s stock price so that Ackman’s Pershing fund could cash in before the end of the year and improve its up-to-then poor performance. This is what New York Post reporter Michelle Celarier suggested in a recent article late last month.

So far, at least, Ackman has not convinced the broader market. After Ackman’s Dec. 20 presentation, Herbalife stock tumbled to a low of $26.06 per share, but it has since climbed nearly 30% higher, closing on Monday at $36.57. Investors like Robert Chapman of Chapman Capital have come to the defense of Herbalife, arguing that the FTC has probably already scrutinized Herbalife and has yet, in the company’s 30-year existence, to take any meaningful regulatory action. In addition, Chapman notes, the FTC is understaffed and overworked in dealing with higher-priority areas like the tech sector. And absent regulatory action, he doesn’t see the Herbalife juggernaut — which has seen large year-over-year gains in earnings and has a solid cash flow — slowing anytime soon.

Eventually, a genuine pyramid scheme must collapse under its own weight, as it runs out of new people to scam. If Herbalife is truly a swindle whose success is built primarily on bilking hapless victims, rather than the popularity of its products, the company will eventually fail. On Thursday, Herbalife will hold an analyst-and-investor meeting to rebut Ackman’s claims. It will be interesting to see if Ackman’s main criticisms are addressed substantially; if the company offers more insight into its very complex system of incentives and payments to sales representatives; and how the stock reacts to the presentation.

The question of who is right and who is wrong, however, is further muddied by the fact that the market doesn’t necessarily reward investors for being right early. If Herbalife’s stock keeps going up in the short term, Ackman might not have the time or resources to see his bet out.